Economic and Financial Impacts of

Natural Disasters
Economic and financial impacts
Major natural disasters can and do have severe negative shortrun economic impacts. Disasters also appear to have adverse
longer-term consequences for economic growth, development and
poverty reduction. But, negative impacts are not inevitable.
Vulnerability is shifting quickly, especially in countries
experiencing economic transformation - rapid growth,
urbanization and related technical and social changes.
In the Caribbean and Bangladesh there is evidence of both
declining sensitivity to tropical storms and floods and increased
resilience resulting from both economic transformation and public
actions for disaster reduction. The largest concentration of high
risk countries, increasingly vulnerable to climatic hazards, is in
Sub-Saharan Africa. Risks emanating from geophysical hazards
need to be better recognized in highly exposed urban areas
across the world because their potential costs are rising
exponentially with economic development.
Natural disasters cause significant budgetary pressures, with both
narrowly fiscal short-term impacts and wider long-term
development implications. Reallocation is the primary fiscal
response to disaster. Disasters have little impact on trends in total
aid flows.
Public policy implications
A full reassessment of the economic and financial impact of a
major disaster should be made 18 to 24 months after the event
that is then taken into account in reviewing the affected countrys
short-term economic performance and assistance strategy.
Governments need appropriate risk management strategies for
future disasters that include medium-term financial planning for 8
10 years. The basis of funding has to be broadened, applying a
combination of mechanisms at different layers of loss coverage to
help overcome the obstacles to increased coverage of insurance
and capital market tools.

Natural hazard risk management should be integrated into longerterm national investment policies and development strategies and
appropriately reflected in the allocation of financial resources.
Quality, reliable scientific information is a necessary condition for
effective disaster risk management. The international community
should support global and regional research and information
systems on risks. It should also ensure that there are adequate
complementary monitoring and dissemination programs at the
national level. Priorities include climatic variability, regional and
national flood forecasting and geophysical hazards.
Economic research on natural disasters
Vulnerability to natural hazards is determined by a complex,
dynamic set of influences, such as economic structure, stage of
development and prevailing economic and policy conditions. To
understand and assess the economic consequences of natural
hazards and the implications for policy, it is necessary to consider
the pathways through which different types of hydrometeorological (climate-related) and geophysical hazard impact
on an economy, the different risks posed and the ways in which
societies and economies adapt to or ignore these potential
threats.
The eclectic approach adopted in this study, employing largely
qualitative methods, is particularly useful in exploring the many
complex and dynamic pathways through which extreme
hazardous events influence an economy and its financial system
and also for identifying areas and issues where further
investigation including quantification would be worthwhile.